3 Reasons Surging Interest Rates May Represent Good News for Home Buyers

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KEY POINTS

  • As interest rates rise, home prices must drop.
  • Rising interest rates serve as a good reminder not to overpay for a home.
  • Interest rates impact more than the price of housing -- consumer goods are also affected.

What feels like bad news may actually be the best news possible.

If you're worried about being priced out of the housing market, I've been where you are. As someone who shopped for her first home when mortgage rates hovered around 18% and inflation stood at 13.50%, I feel your pain. It's frustrating, especially when you know of friends and family who scooped up a mortgage rate under 3%.

Just in case I haven't already given it away, I want you to know that I'm old enough to recognize economic patterns. More importantly, I'm here to tell you that it will be okay. In fact, today's surging interest rates may end up being the best thing that's happened to your bank account in a very long time. Here's why.

1. Prices must drop

Thanks to rising rates, home sales have already slowed. According to CNBC, home sales are at the slowest rate they've been since June 2020. As a reminder, in June 2020, we were sheltering at home due to COVID-19 and people were afraid to either sell or buy a home. Of course, shortly after that rates fell so low that people were able to overcome their anxiety, but homes were not selling well for a few months. And if we skip over 2020 stats, today's rate of home sales is as slow as it was in Nov. 2015.

As interest rates rise, people are priced out of the market (as you may well know). All those home prices driven artificially high when mortgage rates were under 3% now must fall. If they don't come down, there will be millions (and millions) of homeowners unable to sell their property. It's a lesson many of today's home sellers are learning the hard way. Not only are most properties staying on the market longer, but price reductions are becoming a norm.

A few months ago, we sold our home for far more than we imagined it to be worth. We were only able to buy a new house at a fair price because it had the curb appeal of your average prison yard. Between the time we started looking at homes and the time we purchased the house we're in now, interest rates rose more than 2%. I would be lying if I said that I wasn't frustrated, but that leads us to number #2 -- why I know it was for the best.

2. Fewer regrets

When we first started house hunting, I fell in love with a property. The home was huge, with all the bells and whistles. I had mixed feelings about leaving our hometown and thought moving into a big, beautiful house would make it easier. It was $100,000 over the budget we set for ourselves, but I justified the expense. I told myself that we tend to be financially conservative in every other area of our lives. I tried to talk myself into believing that the home would always appreciate due to its location.

I even talked my husband into making an offer. It was less than an hour later that I asked him to rescind the offer. I can't make financially goofy moves, no matter how much I try to justify them. It might feel good in the short term, but I would spend the long term kicking myself.

Fortunately, we found a house with an exterior so ugly that it sat on the market for weeks. We had zero competition. Sure, it looked like one of the Games of Thrones dragons blowtorched the barren yard, but we knew that we could make it our own. Better yet? It cost $200,000 less than the house I fell in love with, and $100,000 less than we budgeted. That's why, at this moment, there's a crew working in both our front and back yards to make them beautiful.

Rising interest rates caused us to rethink how much we were willing to pay for a home. And in the end, that left us with more money to make this home what we want it to be.

Quick confession: Am I a little envious of those who snagged a 2.5% or 3% mortgage? You bet I am. However, I know that we can refinance our mortgage once rates drop again.

3. As rates go up, consumer prices come down

The primary reason the Federal Reserve raises the prime rate (that's the rate banks pay each other when they need to borrow money) is to fight inflation. Here's what the Fed knows: As interest rates rise, consumer prices come down. If businesses want to stay open, they must lower prices to spark interest in buyers.

There's no way around it; that's just good for all of us. When this house needs it, I want to pay less for a new water heater or air conditioning unit. I want to buy linens on sale and fill my pantry with groceries that are reasonably priced. None of that happens when interest rates are practically non-existent. When rates are too low, people take out more loans, use their credit cards to pay for everyday purchases, and worry less about how they're going to pay it all back.

Rising interest rates remind us to buy mindfully. And when we're mindful consumers, business owners must adjust their prices to fit what we're willing to pay.

If you're disappointed about rising interest rates, I truly do get it. But take it from someone who's been around long enough to know what's on the other side -- the day will come when home prices are once again stable enough for you to rejoin the house hunt.

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